Economic background of post-conflict in Colombia

(Based on the article by Ivan Quintero, a specialist in International Trade)

Currently, Colombia is attending as a witness and participant in a situation which consequences may be of such a big magnitude that it is necessary to do some reflection about one of them. We are referring to the peace process that started under the leadership of President Juan Manuel Santos. This involves not only the intervention of armed opposition groups, representatives of the State armed forces, international organizations and members of several sectors of civilian population; but also the opportunity to study this social event from different perspectives, including economic.

Nowadays, Colombian armed conflict has brought the country notable impacts on economics. In one hand, the destruction of the country’s productive infrastructure is involving the replacement of a millionaire amount of fixed capital and the reduction of the potential production of the country. On the other hand, the national fiscal deficit has increased because the government is spending more money in national defense, action which has reduced foreign and local investment for there is lack of economical confidence to entrepreneurs.

Background of Colombian economy towards an eventual peace agreement.

In the present scenario, it is evident that the existence of the internal armed conflict has radically affected the economic background of the country. This has shown that the eventual end of the conflict will leave important consequences to Colombian population. These changes will be noticed in macroeconomics and financial investment. Local and foreign investors would greatly benefit by the cessation of the armed conflict in the country, since this would encourage entrepreneurs confidence in various sectors of the economy. Agents would feel comfortable to contribute with their capital, so that they could participate in the national productive activities, and to travel to Colombia for business. Tourism could also be favored by changing Colombian security image to the rest of the world.

Regarding the oil sector, it would be benefited as soon as the favorable current productive structure of the sector is maintained, and reaches its ideal production beyond the average. This year, Colombia has already reached the production of 1 million barrels a day, which has been achieved not only for the brake on attacks to oil infrastructure, but also for the large volume of capital that this sector produces. In 2012, FDI (Foreign Direct Investment) in oil and mining sectors exceeded 13.122 million dollars, according to Colombia’s Central Bank´s report. With the cessation of the conflict, it would be expected that this financial flow increases, especially in the mining sector.

Both mentioned events, could press revaluation of the Colombian peso due to the increase of foreign exchange earnings to the country because of the higher levels of investment. Investments would become abundant in the national economy, which would low the currency’s price. By this way, Colombian industry could channel a higher level of investment and have fewer replacement costs of fixed capital so that these resources could be focused on productive activities. Achieving this actions, could increase Colombia competitiveness through economies of scale and change its costs structure, which would lessen the effect of the revaluation on exports as cost reduction helps.

Colombian products price reduction has become competitive abroad and cheaper for nationals. An increase in industrial production would increase employment levels, provided that the constant economically active population is maintained. As a decrease in public spending on security and defense would be expected, those financial resources could be invested in health, education and social care; which would benefit economic growth through the promotion of human capital in Colombia.

A possible reduction in public expenditure or at least a redistribution of spending priorities, may entail a reduction in the fiscal deficit; which would allow the State and private actors to pay the external debt while making it more sustainable. Currently, the major international risk rating firms such as Standard & Poor’s and Fitch, have maintained the long-term credit rating of the sovereign debt of Colombia at BBB-, i.e. investment grade, but very close to speculative debt. The signing of a peace deal could prompt rating agencies to change their perspective about the country and increase its ranking in the investment grade.

In the rural and agricultural sector, increased production and reduced costs are also expected. The rural sector would benefit not only from increased security and employment, but also from a possible process of redistribution and return of land.

In regard to the behavior of prices in Colombian economy, an increase in inflation not beyond the goal of the Central Bank could not be expected, provided that the country will be growing economically with an increasing percentage of its workforce employed. A population with high purchasing power would motivate the aggregate demand for goods and hence the increase in general price level (CPI).

These are some of the consequences that would arise in the economic field due to an eventual peace agreement. However, only time and the Colombia’s ability to deal with this new context, may respond to the thoughts that have been addressed in this space.